When an acquirer chooses to use its stock as currency in an
M&A transaction they are faced with a decision on how they are going to
present that offer to the target and its shareholders. The acquirer has two basic choices,
they can offer either a fixed exchange ratio or a floating exchange ratio. A fixed exchange ratio is a pre-defined
amount of acquirer stock for each share of target stock outstanding, such as
.5467 acquirer shares for each target share outstanding. A fixed exchange ratio guarantees the target
shareholders a certain level of ownership in the acquirer once the transaction
completes, but the actual value the target shareholders will receive upon
completion of the deal is unknown until the deal completes as it is based on
the fluctuating value of the acquirer's stock. A floating exchange ratio is based on a specified dollar amount of
stock, but the actual exchange ratio is undetermined until completion. For example, the target shareholders may
receive $24 in acquirer stock for each share of target stock outstanding. This guarantees the target shareholders a
defined value for their shares, but the actual level of ownership they will
have in the acquirer is unknown until completion of the deal as the actual
number of shares they will receive is based on the fluctuating price of the
acquirer's stock.

Since the height of the M&A market in 2007, the
percentage of agreed, all cash transactions involving full acquisitions of US
public targets has dropped considerably and the percentage of deals with stock
as all or part of the consideration offered has increased proportionally. Given this rise in deals with stock as all or
part of the consideration offered, we used MergerMetrics to examine the
distribution of fixed and floating exchange ratios based on a number of
different factors to see if any trends emerged.

The first area we reviewed was to compare the percentage of deals
where fixed and floating exchange ratios were offered in all deals announced
versus only those where a definitive agreement was reached to see if there was
any significant difference between those two sets of deals. Not surprisingly, the percentage of fixed and
floating exchange ratios was about the same, regardless of whether a definitive
agreement had been reached. We then
examined agreed deals involving full acquisitions of US public targets to see
how fixed and floating exchange ratios compared over time. Between 2003 and 2005, the percentage of deals
involving fixed and floating exchange ratios stayed relatively constant. In 2006, when the M&A market started to
fire on all cylinders, we began to see a decrease in fixed exchange ratios and
an increase in floating exchange ratios with the percentage of deals involving
floating exchange ratio increasing over 7% between 2005 and 2006. By 2007, when the volume of M&A deals
reached its zenith and cash was the preferred consideration offered, and then into
2008, the percentage of floating exchange ratio deals continued to increase as
targets wanted to be assured of a specific dollar value of consideration
offered, even if they were choosing to accept stock as some or all of the
consideration offered in lieu of cash. In 2009, the percentage of floating exchange ratio deals has dropped
dramatically and the percentage of fixed exchange ratio deals has increased
in response.

We then compared the percentage of deals where fixed and
floating exchange ratios were offered based on the size of the deal. The percentage of deals with fixed exchange
ratios varied somewhat depending on the deal size, ranging from between 80% to
88% for deals under $1 billion, but increased steadily as the deal size
increased above $1 billion and accounted for almost 94% of deals valued over
$10 billion. This intuitively makes
sense given that deals over $10 bil are frequently transformative for both
parties and target shareholders are generally sold on the expected future
benefits of the combined company and that the value of the stock they are
receiving will increase over time once the expected benefits are realized. Therefore, target shareholders will be more
concerned with the amount of ownership they have in the combined entity and
will want to assure themselves of having as big a piece of those future
benefits as possible. Smaller
transactions are frequently bolt-on acquisitions in which target shareholders
want to maximize the value they receive when the transaction completes as opposed
to relying on the future value of the combined company's stock, which explains
the higher percentage of floating exchange ratios for lower valued deals.

The last area we examined was the distribution of fixed and
floating exchange ratios relative to the type of stock consideration
offered. Fixed exchange ratios accounted
for over 90% of deals where stock was the only consideration offered. Deals where a mixture of cash and stock were
offered saw a 10% increase in the percentage of deals where a floating exchange
ratio was included and choice deals, also referred to as 'cash election' deals
because the target shareholders have the choice of selecting to receive either
cash or stock, saw a further increase in the percentage of deals where a
floating exchange ratio was included relative to stock only deals. Given that cash & stock and choice deals
involve target shareholder receiving, or having the option to receive cash, it
is not surprising that a significantly higher percentage of these deals would
involving a floating exchange ratio where the dollar value of stock to be
received is specified from the beginning of the transaction so that target
shareholders can easily compare that to the cash component being offered.